Download PPT chapter 12

Chapter Twelve
Financial Considerations
12-1
Chapter learning objectives
12.1 Appreciate the potential benefits of accounting
and financial analysis in an event management
context
12.2 Understand what records a business is required
to keep for taxation purposes
12.3 Explain the accounting process and the doubleentry method
12.4 Understand how to develop a trial balance and
explain its value and use
12.5 Understand how to develop a balance sheet and
explain its value and use
12-2
Chapter learning objectives
12.6 Understand how to develop a profit and loss
statement and explain its value and use
12.7 Understand how to develop a range of financial
ratios and explain their use
12.8 Appreciate the value and importance of financial
analysis in the event management context.
12.9 Understand key issues associated with the
management of finance.
12-3
Units of Competence and Elements
BSBFIM601A Manage finances
1. Plan for financial management
2. Establish budgets and allocate funds
3. Implement budgets
4. Report on finances
12-4
Introduction and potential benefits of
accounting and financial analysis
• Profit is based on customer satisfaction.
• Why accounting information is important:
– For taxation purposes
– Shows:
• how a business is performing
• what a business is worth
• how financial performance can be improved
– For making informed business decisions.
12-5
Record keeping for taxation purposes
• Australian law specifies that records must be kept
that:
– specify and explain all transactions:
• including documents showing how liabilities were calculated
• records should be created as soon as transactions are made
– relate to all taxes for which the business is liable
• income tax
• Goods and services tax
• Pay as you go tax
• Capital gains tax
• Fringe benefits tax
– relate to any calculation made under a tax law.
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Double-entry accounting and the
accounting process
• Double-entry accounting
– Transfer of money between source and destination account
– Debit – recorded on the left side of ledger accounts
– Credit – recorded on the right side of ledger accounts
– Left side (debits) must equal right side (credits)
– Each transaction requires at least two accounts.
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Double-entry accounting and the
accounting process
• The accounting process
– Transactions
• Involve an exchange
• Internal – within an organisation
• External – between businesses
– Source documents
• Produced each time a transaction occurs
– Journals and ledgers
• Journals record all transactions impacting on the business
• Tallied at the end of the month to provide summary
• General journals are the simplest forms
• Transferred or posted to ledger accounts.
12-8
Double entry accounting and the
accounting process
Table 12.3 (a)
12-9
Double-entry accounting and the
accounting process
Part of Table 12.4
12-10
Development and use of a trial
balance
• A list of all of the ledger
accounts.
• Insert table 12.5
• Debits must equal
credits.
• Errors can be found
here before moving to
other financial
documents.
12-11
Development of financial statements:
balance sheet
• Provides a summary of the current worth or financial
position of the business at a point in time.
• Owner’s equity = assets – liabilities.
• Assets
– Current assets
– Fixed assets
– Intangible assets
• Liabilities
– Current liabilities
– Non-current liabilities
12-12
Development of financial statements:
balance sheet
• Owner’s equity
– Owner’s equity =
assets – liabilities
• The example does not
include non-current
liabilities, which most
businesses would
expect to have.
12-13
Development of financial statements:
the profit and loss statement
• Reports on the net profit
recorded over a period of
time.
• Net profit =
revenue – expenses.
• Revenue – income earned
by the business.
• Expenses – costs incurred
by a business to earn
revenue.
• Net profit becomes retained
earnings in the balance
sheet.
12-14
Development of financial statements:
cash flow statement
• Also called a statement of cash flows or funds flow
statement.
• Profits do not mean there are no cash flow problems.
• Cash flow statement shows a business’s liquidity.
• Reports inflows and outflows of cash related to:
– operating activities
– investing activities
– financing activities.
• Cash flows are produced over short periods to
highlight issues, e.g. monthly.
12-15
Development of financial statements:
cash flow statement
12-16
Financial ratios
• Measures of liquidity
– Current ratio
• Measures ability to meet creditor demands
Current ratio
=
current assets
current liabilities
– Net working capital
• Alternative measure of liquidity
• Net working capital = current assets – current liabilities
• Needs to be positive
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Financial ratios
• Leverage measures
– Debt–equity ratio
• Relative amount of funds provided through debt
• The higher the ratio, the higher the risk of defaulting
Debt–equity
ratio
=
long-term debt
equity
• Measures of profitability
– Net profit margin
• Rate of profit from total revenue
Net profit
margin
=
net profit
total revenues
12-18
Financial ratios
– Return on assets (ROA)
return on
assets
=
net profit
total assets
– Return on equity (ROE)
• Measure of overall profitability of a business
return on
equity
=
net profit
equity
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The value of financial analysis in
making business decisions
• Business decisions always have financial
implications.
• The ability to interpret financial information is critical.
• Measures of liquidity can show cash flow problems,
and control measures can be implemented.
• Leverage measures can show too much debt is
being carried, and reduction of debt is required.
• Measures of profitability can show comparisons with
other similar businesses.
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Managing event finances
• In order to ensure financial viability:
– Continuously monitor liquidity
• If liquidity problems begin to emerge take corrective action to
increase cash inflows and reduce cash outflows
– Monitor levels of debt
• If debt levels rise significantly consider actions that may
reduce reliance on debt
– Measure profitability and ROA, and analyse recent trends
• Reductions in levels of profitability may highlight the need to
look for new sources of revenue or seek ways of reducing
costs
12-21
Chapter summary
• The accounting process starts with a transaction.
• These transactions needs to be followed through to
posts in journals, then transferred to ledgers.
• At the end of the financial year, trial balances,
balance sheets, profit and loss statements and cash
flow statements should be prepared.
• Key financial ratios can then be calculated to
monitor the state of the business and its ability to
maintain operations and aid in the decision-making
process.
12-22